The reformation of high marginal tax
rates for the top earnings brackets could be a vital course of action to combat
growing income inequality in America. Low effective rates for the rich are not
the exclusive reason for the growing divide between poor, middle-income, and
wealthy people, but this phenomenon contributes to the widening income
disparity in many destructive ways. Hacker and Pierson note that “progressivity
used to be very pronounced at the very top of the tax code; now it is almost
entirely absent.” We can observe from Gini coefficient inquiries that
inequality measures excluding the top 1% of income earners demonstrate less
inequality than those which include the top 1%. A much higher degree of
divergence is noted as one approaches the upper echelons of earnings brackets.
As inflation and the cost of living rise, the real value of the dollar
decreases, and as earnings of those in middle and lower income brackets
stagnate, their ability to exercise free will in a market economy becomes
increasingly limited. With income gains becoming more and more concentrated in
the hands of fewer people, and quality of life deteriorating for those who
cannot keep up with the economy’s rate of expansion, there is a compelling case
for the extension and expansion of tax rates to mitigate the prevalence of
inequality.
When glancing over the familiar and
commonly observed IRS income tax rate schedule, which compels those who earn
more income to pay more, one could take for granted that US tax policy behaves
in a progressive manner. However, upon closer inspection of the more tangled
structure of our tax base, it is easily observed that our system is only merely
progressive (Campbell, 104). In the mid-20th century, the top marginal tax rate
was usually above 90%, and today it is 35%. In the 1970’s, the top capital
gains tax rate was at 35%, and today it is 15%. The average rate at which the
top .01% of taxpayers were taxed has decreased from over 40% to around 25%. Not
only do these trends in tax cuts fail to correlate with any growth in the
economy, but they also appear to be related to increasing concentration of
incomes in higher earnings brackets (Hungerford, Taxes and the Economy, 16). In comparison to other OECD countries,
the US not only taxes their wealthy at modest rates, but they also do very
little to redistribute the income that they receive from taxation. Andrea
Campbell argues that due to dissimilarity in terms of how fiscal policy and
government spending are considered, the United States experiences greater
inequality than other advanced nations. The amount of tax revenue that they
receive as a percentage of the GDP is much lower than other countries in the
industrialized world. 24% of America’s GDP comes from taxation, compared with
France, Finland, Sweden, and Italy, whose tax bases makes up for close to half
of their countries respective GDPs (Campbell, 101). This is not due to a
smaller or less affluent tax base, or a higher incidence of tax delinquency,
but because America fails to impose competitive taxes on the greatest
agglomerations of wealth. Whereas the countries mentioned above continue to
levy substantial taxes on substantial sums of wealth, America has strayed from
this course, and has done increasingly so since after World War II (Hungerford,
2). This leaves the U.S. without what could be a significant source of revenue
that would be more than useful for our domestic budget. Perhaps if the GDP and
federal budget were to see a sizeable increase, it would be reasonable
motivation for congress to cease contemplation of spending cuts and more avidly
support legislation for general social welfare expenditures, like health
insurance, public transit, job training, and education.
With this mass quantity of funds gone uncollected,
there is ultimately a smaller pool of money with which to spend on social
programs and other ventures to improve quality of life for general citizens.
Campbell notes that our tax and transfer system with little emphasis on
redistribution does little to alleviate market-generated inequalities in the
way that some European economies do. The services afforded by social market economies
grant a much greater degree of protections than liberal market economies from
forces that are pervasive in any market. People living in SME countries
typically have greater unemployment protections, greater spending on education,
effectively lower costs of living, and less strife between each socioeconomic
stratum (Pontusson, 58, 65). Expenditures like these are not inconsequential,
especially so for those who do not possess the means to control their own
economic fates. While social services may be unpopular among the rich due to
their lack of need for them, they provide a great deal of support to everyone
else. In addition, some government services benefit those who are more well off
more so than anyone else, and in some cases only benefit them (e.g. through
police protections, defense of contracts, subsidized public infrastructure)
because they have much more expendable capital, more property to defend, and
concurrently and most importantly, more assets to lose. Why should it be the case that commonplace
citizens foot the bill for a system of social services which hardly reconcile
with the needs of the populace, rather than those who reap distinctly greater
rewards out of it?
Expanding taxes on the rich would
generate a great deal of revenue that could be utilized to educate, support,
and supplement the masses. It does not call for outright piggybacking of the
rich; it merely calls for an imposition on the mass amounts of capital which
proportionally dwarf the incomes of those not in the higher earnings
distribution in order to create a more impartial and unobstructed socioeconomic
system. As wealth is allowed to beget itself, so is poverty and inequality. By
shifting resources from sitting in hoards to supporting action, the potential
of this wealth is finally realized. Money represents enduring wealth, which is
functional only so long as it is utilized. In observing how vast sums of
capital are made use of in this heavily financialized economy (entailing the self-generation
of more capital), it is no surprise that money has been unsuccessful at
functioning as a mechanism for which the common person could build and sustain
wealth (Hacker & Pierson, 55). As gains become more concentrated and the
share of the economic pie drifts continuously into the hands of the super
affluent, the scarcity of money begins to increase in significance. While a
majority of Americans continue to back various social causes like financial aid
for college, improved public education, and support structures for the poor,
there is not as much flexibility in the budget to support these endeavors
(Campbell, 110). Disbanding and dispersing private sheltered reserves of
capital into societal expenditures would not only sharply decrease the
magnitude of economic inequality, but it would provide for a much more sizable
budget that could be geared toward aiding the well-being and mobility of the
ailing, at-large population.
The odds that we could see something like
an increase in the top marginal rates is highly unlikely at this point in time.
For years, we have observed a trend of diminishing rates at the higher income
levels for reasons that are seemingly aimless. We can see the negative effects
of what reductions in the top marginal rate does to GDP, amount of tax revenue,
budget, and amount of inequality, yet the course continues. Public opinion at
large has also never been in opposition to taxes on those who earn more money,
especially so when that income is earned from dividends and capital gains. Our
current taxation system is very complicated and convoluted, and it creates
confusion and mistrust because of its high degree of obscurity. In one study,
Americans were asked what bothers them most about taxes, and in what seems like
a farce, it was reported that they were more than twice as likely to note the
complexity of the system as their primary reservation than they were to refer
to the amount they pay (Campbell, 110). Should simpler codes be put into place,
there would likely be less skepticism among people who cannot easily grasp the
intricacies of taxation systems. If there is anyone in favor of tax reform, it
is most likely the average citizen.
It is due to a number of connected and
disconnected factors that effective tax rates have been allowed to slip down to
the levels that they are today. The importance of lobbying in government has
led affluent individuals to, either collectively or independently, overinflate
the voice and perceived prominence of minority groups that are often highly
ideological and very extreme (Hacker & Pierson). The cost of this
newly-afforded attention from policy makers comes at the expense of the
working-class citizen, whose role in government cannot exceed that of their
ballot casting due to time constraints, lack of sophistication & interest,
and needless to say, their inability to contribute funds to campaigns. As
income gains become more concentrated, the likelihood that any one person can
contribute to an election campaign and have their views expressed through
policy enactments becomes more and more slim. The “Winner-Take-All” model
described by Hacker and Pierson leads to a lapse in democratic practice and
distorts the political landscape by having interests relayed as a function of
monetary donations. The formation of the first Political Action Committee in
the 1970s marked the first time that members of Congress could look to
alternative places for campaign funding, which had a powerful impact on the
governing body’s ideological balance (Hacker & Pierson, 178). Business interests
massively increased their contributions to campaigns right around the time that
campaigns were becoming more expensive, and politicians had good reason to heed
the interests that had the greatest quantities to contribute (177). The
financing of the GOP by corporate and business PACs was viewed as an investment
that would ensure commitment to an agenda of advocacy for the free market, advancing
deregulation and tax cuts. The “Contract with America” movement spearheaded by
Newt Gingrich in the 1990s reflected a sensationalizing approach to why we
needed lower taxes (Gravelle, 3). Not only were GOP seats debased in return for
investment, but democrats were also. They had to respond to this new political
machine and had to do so in a receptive manner, or else they would be snubbed.
Money was channeled to Democratic candidates in order to discourage the passage
of undesirable bills, creating loopholes in attempts to enact new legislation. This
outcome is termed “Policy drift,” which is the “politically driven failure of
public policies to adapt to the shifting realities of a dynamic economy and
society.” (Hacker & Pierson, 170) This drift makes policy enactments
difficult, while at the same time giving policy based on the exploitation of
drift a much easier course to navigate. Political gridlock favors the status
quo, which has more support among Republican congressmen, accordingly leading
them to support gridlock. Increased polarization leads to less action, which
leads to less adaptation, which begets the continuation of the status quo.
While policies allowing for top tax rates to dwindle have enjoyed the support
of congress, policies calling for increased taxes on the wealthy have gone
ignored, and there has been almost no serious attention paid to initiatives to
boost the stock of middle and lower income groups. It is plausible that due to
a lack of incentive or a fear of political backlash that congressmen have
remained idle while gains made in upper earnings brackets detract from the rest
of the economy.
An increase in the top marginal tax rates
would have to occur as a result of widespread salience of the issue in which
the population sees that it has a negative impact on their well being. Many
people may have problems with being able to view this issue and see that this
phenomenon of protecting vast wealth occurs as a result of processes that are
purely political. As Bartels noted throughout Unequal Democracy, voters are largely unsophisticated, and they
should not be expected to hold views that seem as though they are
fully-informed or rational (65). Legislation for greater taxation of the
wealthy will likely not be written by any congressman whose campaigns are funded
by wealthy people who would suffer as a result. The difficulties with our
current tax system transpired deliberately through specific actions and
non-actions on the part of legislators. In order to sidestep this collective
problem with the status quo, it need first be recognized that change is both
possible, and perhaps more importantly, necessary. If the average citizen
cannot recognize that high top marginal tax rates are something which would be
in the best interest of the country, it is more than doubtful that legislators
with an eye on their bankroll for the next election campaign would be any more
eager to increase taxes on the people who finance the continuation of their
employment.
Increasing the top marginal tax rates is
an effective measure to alleviate pressures on those who are not fortunate
enough to garner sizable values of income. John Rawls stated “a particular
allocation yields an optimum if there is no redistribution which would improve
one individual’s position without worsening that of another.” I see no fundamental
problem with the greatest gains of some being allocated to offset the lesser
losses of others. In order to combat the ills that arise with inequality, it is
best to prevent it before it can become too pervasive. In a country where 60%
of the top .01% of taxpayers have leverage over their compensation, and
increased financialization of the economy has created a game of fabricating
prosperity, it is impossible to join in creating wealth without first starting
off in faultless circumstances (Campbell, 111). This leaves most all people out
in the cold to fend for financial footing in the sphere of
commerce where activity remains constant. The potential of a person is cut drastically when
they do not have access to opportunities to exercise their abilities. To create
more favorable and equitable outcomes in a society, a principle of fairness
must be applied at the origination. Rawls “Justice as Fairness” maxim showcases
a view which purports that every person has an equal claim to equal basic
rights and liberties. His “Veil of Ignorance” thought experiment questions the
idea that we would ever want a society that could be unfair. If a person did
not know their place in society, he argues that people would generally tend
toward supporting principles that are fair to everybody (80). I agree with this
notion that anybody who did not know their position in society would support
equal standing as a starting point.
Robert Nozick argues against this claim and establishes it as an
“entitlement theory.” (96) The idea behind Rawls view is that one is subject to
forces beyond their control in any given point in their life. In order to
combat any issues that could arise as a result of being subject to
environmental factors, one can attempt to dissolve those detrimental factors.
If those were lifted equally, then everyone is subject to the same remaining
forces. Nozick is incorrect because he fails to recognize that total control of
one’s life is not in the hands of any individual. The forces around them have
much more to do with their fate than anything, and at life’s inception, there
is no autonomy whatsoever. In order to grant the greatest degree of liberty and
freedom to the greatest number of people, a starting point with more alike, or
at least more adequate resources should be standardized and protected. In order
to combat the growth of inequality, we should see to it that the substantial
gains of some are not accruing at the costs of others, and recognize that the
socialized costs of not redistributing inactive swaths of capital are greater
than the would-be losses by a large margin.
Citations
Bartels, Larry M. Unequal Democracy: The Political Economy of the New Gilded Age. New
York: Russell Sage Foundation, 2008. Print.
Campbell, Andrea Louise. "America the
Undertaxed." Foreign Affairs. 1
Sept 2012. Web.
Gravelle, Jane. “Capital Gains Taxes: An
Overview.” Washington, D.C.: Congressional Research Service, Library of
Congress, n.d. 24 Jan 2007. Web.
Hacker, J. S., and P. Pierson.
"Winner-Take-All Politics: Public Policy, Political Organization, and the
Precipitous Rise of Top Incomes in the United States." Politics & Society 38.2 (2010):
152-204. Sage Publishing. Web.
Hungerford, Thomas L. “Changes in Income
Inequality Among U.S. Tax Filers between 1991 and 2006: The Role of Wages,
Capital Income, and Taxes.” 23 Jan 2013. Web.
Hungerford, Thomas L. “Taxes and the Economy: An
Economic Analysis of the Top Tax Rates since 1945.” Washington, D.C.:
Congressional Research Service, 2012. Web.
Nozick, Robert. "Distributive Justice."
Readings in Social and Political
Philosophy. New York: Oxford UP, 1986. 96-116. Print.
Pontusson, Jonas. “Inequality and Prosperity: Social Europe vs. Liberal America.”
Ithaca, NY: Cornell UP. 2005. 1-94. Print.
Rawls, John. "Distributive Justice." Readings in Social and Political Philosophy.
New York: Oxford UP, 1986. 73-94. Print.
